Plantation stocks take a beating

In a report 'The grass is no longer green', CIMB Investment Bank downgrades the plantation sector from 'overweight' to 'underweight'

MALAYSIAN oil palm stocks tumbled yesterday, dragging down the Kuala Lumpur Composite Index (KLCI) to its lowest since December 2006 amid another plantation sector downgrade.

The KLCI fell 16.1, or 1.4 per cent, to 1,105.04 points, making it the region's second biggest decliner. It has fallen 23.5 per cent so far this year.

However, the slump in the local market was not isolated as regional markets also fell. Analysts said the lower crude oil price has caused fear of a pullback in commodity prices.

Malaysia's crude palm oil futures declined 2.2 per cent yesterday to more than a two-month low, as crude oil prices settled at about US$130 (US$1 = RM3.24) a barrel after sliding more than 10 per cent in the last three days.

"Plantation stocks are well-owned by foreigners and they are now throwing in their towels on concerns of local political turmoil amid a slowing global economy," said an analyst from a foreign house who declined to be named.

Aseambankers head of research Vincent Khoo said in his report that the research house would generally avoid plantation stocks and that the KLCI's advance may be "retarded" by the continued selling of plantation stocks.

Aseambankers plantation analyst Ong Chee Ting said the research house had called an underweight on the sector since the end of the first quarter.

"We are less bearish right now because plantation stocks have corrected quite a bit. Plantation stocks can tend to over react in a short term due to negative sentiment and downgrades by the houses," he told Business Times.

These stocks took a beating yesterday after the country's second largest lender cut its rating on the plantation sector.

In her report "The grass is no longer green", CIMB Investment Bank Bhd analyst Ivy Ng downgrades the sector from overweight to underweight, citing rising regulatory risks and slowing earnings momentum as reasons.

Ng said the market had underestimated regulatory risks, which have increased for the sector and could li-mit earnings.

"If CPO prices continue to head higher, governments may levy higher taxes on planters to rein in inflation. There is also an increasing risk that biofuel targets may be scaled back," she said.

Ng added that fertilis-er prices, which make up roughly 20 to 30 per cent of operating costs, had more than doubled year-to-da-te adding cost pressures on planters.

CIMB cut its earnings forecasts for its plantation stocks by two to 20 per cent to account for higher operating costs and recent changes in windfall tax.